U.S. to file civil charges against S&P over crisis bond ratings

The U.S. Justice Department intends to file a civil lawsuit against Standard & Poor’s based on ratings in 2007 of certain collateralized debt obligations, the company said today.

The Justice Department and state prosecutors may file civil charges this week against S&P, the largest credit ratings firm, alleging wrongdoing in its ratings of mortgage bonds in the lead up to the 2008 financial crisis, according to two people familiar with the matter.

The lawsuits from federal and state authorities come in the wake of criticism from U.S. lawmakers over the role of bond rating firms in the onset of the financial crisis.

Inflated grades on bonds backed by subprime mortgages helped ignite the worst financial crisis since the Great Depression when their values plummeted more than five years ago. Analysts at S&P, owned by New York-based McGraw-Hill Cos., Moody’s Investors Service and Fitch Ratings were pressured to give their stamp of approval to complex investments in a “race to the bottom” to win lucrative business from Wall Street banks, the U.S. Senate Permanent Subcommittee on Investigations said in an April 2011 report.

“A DOJ lawsuit would be entirely without factual or legal merit,” the company said today in a statement. “It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market -– including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained -– and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency.”

Charles Miller, a spokesman for the Justice Department, did not immediately respond to an e-mail seeking comment. The potential lawsuits were first reported by the Wall Street Journal.